Jim Covello of Goldman Sachs says AI is advancing rapidly and attracting huge amounts of investment, but the business case is still unproven.
“In the past few years, we’ve been moving further from it, not closer to it,” Covello, the bank’s head of global equity research, said on the “Exchange” podcast on Tuesday.
That’s because as companies continue to invest, the amount of profits they need to justify their spending also increases, he said.
Covello’s comments come as companies continue to pour hundreds of billions of dollars into AI, sending the S&P 500 index to record highs, and investors continue to debate whether the technology will return the buck.
He acknowledged that some developments have exceeded his expectations. Consumer adoption is stronger than expected, AI models are rapidly advancing, and businesses continue to increase spending on the technology.
It remains to be seen whether AI can deliver returns that justify the huge outlay.
“All of the economic value continues to accumulate in semiconductor companies,” Covello said.
This is in contrast to previous technology cycles, where chip makers prospered as their customers prospered.
While semiconductor companies are currently reaping huge profits, companies above them in the AI supply chain have not yet shown comparable economic returns, Covello said.
Major cloud providers continue to increase AI-related capital spending, even as investors debate when their investments will start producing meaningful returns.
“In many ways, businesses today are losing more money by deploying this technology than they were two years ago,” he said.
A big reason is the fear of being left behind.
“There’s a tremendous amount of FOMO at every level of the supply chain,” Covello said, adding that spending is outpacing proven benefits.
“I think it’s because everyone is afraid of what will happen if the technology really takes off and we find a big positive economic use, and our competitors understand it and we don’t,” he said.
At the end of the day, the question is whether the industry’s massive AI spending will yield meaningful returns.
“At some point, you have to make money. You invest in a business to generate profits and make money,” he said.